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Where is Gold Going in 2012?

Gold has declined in recent trading with last week representing the most dramatic slide in three months for the precious metal. The weakness in gold seems to have more to do with the current strength of the dollar than with external factors, which include a potential credit downgrade for France, general weakness in the eurozone and the geopolitical risks posed by the death of Kim Jong-Il. Today gold began to regain some of its lost strength alongside a rally in the broader market, revealing a trend that some top analysts have been noticing since September and could continue into 2012.

Gold has been on a decade long bull–run and has been lauded for its history of success as a safe haven in times of economic turmoil. The precious metals activity in the last several months, however, seems to buck its trend of rising in periods of volatility. Between mid-October and now, through the heated debates about the outcome of the euro crisis, gold stayed in a range of between $1,650 and $1,750 a troy ounce. These numbers fall well beneath the metal’s high of $1,950 for the year in spite of representing the most perilous potential period for the global economy since 2008’s financial crash.

Gold bulls seems confused by the new trend which has the metal more closely tracking the volatile equities market than protect investors from it as it once did. Shortly after gold reached its peak, stocks started to experience massive swings of volatility and many investors sold off massive holdings of the metal in order to raise capital. Since then, it appears to be a go to for recovering lost funds. When stocks lose, so does gold. When the market perks up again people buy their holdings at new lower levels.

As gold diverges from the habits of other recognized safe havens like US Treasuries, the metal may start to follow a path that far removed from what bulls have been claiming makes it so valuable to begin with. The opinions about he direction of gold in the media seem to support the notion that gold will continue to rise in 2012, reaching $2,000 per metric ton. Goldman Sachs (GS) is considering buying between 400-600 metric tonnes of gold in 2012 as the company believes the precious metal will average $1,810 during next year on the basis of volatility in the markets and Chinese demand. Barclay’s (BCS) has adopted a similar position anticipating the precious metal will average $2,000 an ounce and remain a “structural pillar of support,” amid economically unattractive interested rates and rising inflationary pressures.

Should gold follow its historical trajectory and China continue to play a major role in the rise of gold, it’s possible that gold will reach $2,000 next year. There is evidence in the place that would indicate Chinese buying will continue to be strong as Beijing deregulates its gold trading, but it would be difficult for the nation to rocket gold up without the enthusiasm of investors and with the continued lack of liquidity. Gold is one of the easiest ways to build liquidity and in times of shortages, the sale of gold tends to be high and keep the price low.

A recent piece in the Financial Times suggests that another factor could also influence the direction of gold in the coming year: the decisions of the European Central Bank. “This suggests the trigger for gold’s next move is likely to be the actions of central banks – particularly the European Central Bank, which many investors believe will be forced to provide a backstop to the eurozone by more aggressively intervening in the sovereign bond markets,” says the piece. Essentially he suggests that if the tinkering and the inflationary efforts, resultant of decisions made by the global central banks, are sever enough, gold could resume its former role. Investors sometimes respond to panic regarding the actions of the central banks by exiting currencies or government bonds, opening up an opportunity for gold to resume its status as a former safe haven.

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